Will 2013 Be Naughty or Nice?

As 2012 comes to an end, 2013 looks more naughty than nice due to a major cloud of uncertainty spilling into grain and oilseed markets.

The proverbial fiscal cliff is still looming, and demand prospects are dimming. The odds of the United States tumbling into recession are not high, but they are rising. If Congress fails to reach agreement on tax and spending issues, the result could be lower demand for agricultural commodities.

"If the payroll tax cut expires, the accumulative effect would be a sizeable cut in disposable income, which could affect demand in 2013 as people see their paychecks shrink," says Chad Hart, agricultural economist at Iowa State University. The 2% reprieve in the Social Security payroll tax is just one of several tax breaks set to expire January 1. Ending the tax cut, would remove $125 billion from the economy in 2013.

Other issues that could play out to impact feed prices in early 2013 are continued high unemployment, the possibility that deepening economic slowdowns in Europe or China push the United States toward recession, and growing inflation that sparks higher interest rates.

Economist Ernie Goss, Creighton University, thinks the value of the U.S. dollar will be the number-one factor affecting corn and soybean prices in the short run.

"When the level of international risk increases, money goes into safe havens, and the number-one safe haven is the U.S. dollar," says Goss. "The global economy is weakening, and the U.S. trade deficit is worsening." He thinks agricultural exports could continue to weaken in the short run as the dollar continues to strengthen.

"We seem to go through three to six months of risk on and then three to six months of risk off," says Bill Lapp, Advanced Economic Solution, Omaha. "Since fall, we’ve been in a risk off environment."

In a risk-off environment, investors seek safe investments, typically pushing the value of the dollar higher, which in turn pushes grain, oilseed, and crude oil prices lower. Over the past three months, crude oil prices have dropped from a high near $100 per barrel into the high-$80 range.

"Europe is technically in recession. China has been bad-mouthed for its economic performance. And the United States is in gridlock," says Lapp. "That could reverse pretty easily in 2013, though." If and when the world economy improves, investors will return to risk on investments, which will push the dollar lower and crude oil higher.

"There’s evidence that the Chinese economy is improving," says Lapp. "And there’s a good chance something will come out of Washington, even if Congress just kicks the can down the road."

While volatility could increase over the next few weeks, after the presidential inauguration, the world could look a bit rosier for corn and soybean producers. Gas prices could increase, which would improve corn demand from ethanol plants, says Lapp, and China’s cancellation of soybean orders could slow if not stop.

Europe, while still a risk, appears to be fading into the background. "We are more worried about blowing up rocks on the Mississippi (to ensure barges can travel up and down the river) than we are about Greece’s economy blowing up," says Lapp.

Hart advises producers to fix variable-rate debt, and watch corn and soybean futures closely. With new-crop prices already at a $1 per bushel discount to old-crop prices, Hart suggests using options to protect the $6 level. If a recession were to occur, Hart says prices could drop quickly. During the Great Recession, corn futures fell from above $7 per bushel in July 2008 to near $3.50 by December of the same year.

For More InformationEditor's Note: As we prepare to put 2012 to bed, it is always a good idea to reflect on the past year. For the remaining days of 2012, the editors at AgWeb.com will bring you stories that were important this year and will continue to be top of mind in 2013.